A Closer Look at the Iraqi Banking Sector

Singapore-based Sansar Capital Management has issued a comprehensive new report on the Iraqi banking sector:

Executive Summary

The Iraqi banking sector is poised for significant earnings and asset growth over the next decade driven by a strong macro environment, increasing credit penetration and an improving security situation. The IMF forecasts Iraqi GDP to grow at a rate of 9.0% in 2013 on the back of 8.4% growth in 2012 placing Iraq solidly in the category of one of the fastest growing economies in the world. The IEA in its World Energy Outlook report stated that Iraq is expected to contribute 45% of the global incremental oil supply over this decade. As a result, the IEA central scenario forecast predicts Iraq GDP to grow 151% between 2011 to 2020.

Rising credit penetration is likely to further fuel banking sector growth. According to the World Bank, Iraqi domestic credit to GDP stood at a mere 9 percent of GDP at the end of 2011 as compared to a 55 percent of GDP average for the Middle East North Africa (MENA) region.3 Domestic credit to GDP grew at a clip of 89 percent CAGR between 2009-2011.

Buoyed by strong economic growth and rising credit penetration, the 5 largest private Iraqi banks grew aggregate net income by 207% between 2010-2012. Dilution driven by increases in equity capital resulted in earnings-per-share growth to be lower but still impressive with aggregate EPS growth of 111% from 2010-2012.

The growth in GDP and banking sector earnings go hand-in-hand with the improving security situation. As violence declined by over 80% between 2006-2012, Iraqis in many parts of the country enjoyed relative calm and stability. In 2012, large U.S. cities like Chicago and New Orleans had higher violence related deaths per capita when compared to Iraq. That is not to say all areas in Iraq are safe. Violence in Iraq remains highly localized with 91% of the violence related deaths occurring in 7 of the 18 provinces and 2/3 of the violence being inflicted on 1/3 of the population. The remaining 11 provinces, including the southern oil-rich provinces, have had relative security and stability.

While the mix of an improving macro environment and security situation offer attractive investment ingredients, many challenges remain for those interested in participating through public markets. Iraq continues to be ranked as one of the most difficult places to conduct business and is often ranked high on corruption indices. Corporate governance at most publicly traded companies is poor and regulatory oversight weak; anecdotal examples of management teams serving their own self-interest at the expense of other stakeholders remain abundant. In such an environment, investors are cautioned to carry out extensive due-diligence including having on the ground presence in Iraq.

Please click below to read the full report from Sansar Capital Management: